Starting an Emergency Fund

by Sean Bryant on April 11, 2012

Starting an Emergency Fund

I am a firm believer that one of the first things that people should do once they eliminate their debt and reduce their spending is to create an emergency fund. This will help to protect yourself from getting into debt again in the future.

What is an Emergency Fund?

An emergency fund is a liquid amount of cash that you can easily access if some sort of an emergency pops up. When I talk about an emergency I mean an unexpected surgery or needing to replace your air conditioner. I don’t mean so you can take a trip to the caribbean because you are overly stressed out.

With the amount of job layoffs over the past four years and the continued high unemployment rate, having an emergency fund has never been more important.

How Big Should Your Emergency Fund Be?

If you look around the Internet at different personal finance websites you will see a lot of different figures for what the ideal amount is. Some people say your emergency fund only needs to be $1,000 to $5,000. I personally feel you need to have at least enough to cover 4-6 months worth of household expenses. My wife and I currently have six months and this makes both of us feel comfortable if something were to happen to our income.

Where Do I Put The Money?

After you have made the choice to start your emergency fund you need to decide where to put the money. The answer is simple. You need to stash it in a high yielding savings account. Right now you can open one through ING Direct and it is yielding 0.80%. Another option would be Ally Bank which yields 0.84%.

By placing it in a high yielding checking account you are still earning more money than underneath your bedroom mattress but it is also easily accessible if you need the cash quick.

If you follow my advise and set up an emergency fund then you should feel safe the next time an unexpected financial emergency pops up in your life.